The Complete Breakdown of Double Taxation from a C-Corp (Paying Yourself a Salary)
In this episode of Coffee with Carl, attorney Carl Zoellner guides you through the process of paying yourself.
Alright investors, we’re going there.
Double taxation within a corporation
Let’s get to the nitty-gritty of it all.
First and foremost, I can’t give you the “one-works-every-time” rule for investors, it’s going to depend on what you’re doing, and on which entity we would suggest.
Usually, when someone talks about double taxation and C corporation, it’s because the C corporation currently pays a flat tax of 21% on any income. And then if you pay yourself a salary or dividend, they’re considering the second payment taxable too.
When you look at paying yourself a salary, it’s where it comes out as a wash, because when you pay yourself a salary, your corporation is taking a deduction for paying that salary. But yes, you are paying your personal tax rate plus your self-employment tax, so you’re splitting with your corporation on that income.
Actually, the most pure form of double taxation in a C corporation is your dividend payment. Dividends are taxed at long-term capital gains rates, so that’s beneficial from a tax perspective, but they’re not deductible to the corporation. If the corporation has taxable income, it’s paying at 21%, and if it’s paying you a dividend as a shareholder or owner, then you’re then paying tax at long-term capital gains rates.
Even in that scenario, in most cases you’re really not looking at anything over 36%, which for a lot of you say in California or states with high income tax, that’s still usually probably lower than your effective rate in a lot of places. So just as an FYI on that one, it’s not quite the monster in a closet we’ve all been taught it is.
The other thing, in a C corporation it’s voluntary so I don’t have to pay myself a dividend payment. I don’t have to pay myself a salary. Most business owners out there, if you do a little bit of tax planning, a lot of the money that’s going to come out of that corporation to you, you can take out as a reimbursement, which comes out at 0% tax.
Really what it comes down to is if you’re paying tax at multiple levels in a corporation, a lot of times, it’s because you’re not doing the requisite tax planning to avoid it. Like I said, I just want to talk about that a little bit. Is it possible to have two levels of tax within a C corporation? It is, but there’s some real benefits in a C corporation that either don’t work the same as in an S corporation, or just aren’t available.
How about medical care reimbursements? Another great tool that a C corporation can do differently than an S, because an S is a flow through, and a C corporation is not, so a C corporation could reimburse those expenses as part of a medical reimbursement plan.
Another thing is for high W2 income earners out there. With a C corporation, you’re not required to pay yourself a reasonable salary. In an S corporation, you are. So you can run into a scenario that if your corporation is making a significant amount of money, if you’re already a high W2 income earner, you may not be able in an S-corporation to turn that spigot or faucet off of pouring onto your W2. In a C corporation, you can.
The Takeaway
There’s some specific “in general” reasons to put folks into a C corporation, or have you utilizing a C corporation within your structure, but I did want to talk a little bit about the double taxation thing, because it is one of those topics that pops up quite a bit.
Keep taking advantage of our FREE educational opportunities and the free content we put out on the web. So that’s Toby’s Tax Tuesday, our tax and AP events for our clients who’ve already gone through our Tax and Asset Protection event.
Our Structure Implementation Series is fantastic. That answers a lot of the questions you have in the beginning. So there are a lot of different educational opportunities out there. One of my favorites as well is our Infinity Investing Workshop.
Resources mentioned in this video:
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